Select and execute the best trades and reduce risk
Rather than teaching options from a financial perspective, How to Price and Trade Options: Identify, Analyze, and Execute the Best Trade Probabilities goes back to the Nobel Prize-winning Black-Scholes model. Written by well-known options expert Al Sherbin, it looks at the basis for probability theory in option trading and explains how to put the odds in your favor when trading options. Inside, you'll discover how anyone can "operate their own casino" if they know how through proper option strategies. Plus, a supplemental website includes videos that walk you through various probability scenarios, pre-formatted spreadsheets, and code.
All investors should have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays, they can also help you earn larger profits with a smaller amount of cash outlay. With the help of this book, traders, active investors, and self-directed investors of all stripes will learn how simple it can be to deploy probability-based trading strategies. * Teaches both defined and undefined risk strategies * Utilizes simple cost basis reduction strategies to enhance investment returns * Draws on unique research studies * Discusses volatility to include both historical (realized) and implied volatility: the interplay between the two is a key piece of information overlooked by option traders
If you're a trader of any level and want to make the best trades possible, this book has you covered.
Introduction xi
CHAPTER 1 Why Trade Options? 1
Strategic without Being Directional 2
A Word about Leverage 2
Options Are a Decaying Asset 5
Insurer or Insured? 6
Probability of Making Money 6
Market Efficiency 7
Tired, Worn ]Out Metaphors 9
CHAPTER 2 What to Look for in a Broker 11
Brokerages versus Banks 11
Depth of a Broker s Pockets 12
Trading Risk Management 13
Learning from Recent Events 14
Account Types 14
Commissions 16
Interest Rates 18
Stock Borrow and Loan 19
Trading Platforms 22
Conclusion 24
CHAPTER 3 Building the Foundation 25
Option Pricing Models 26
Option Pricing Model Inputs 27
Historical Data as Input into the Implied Volatility of an Underlying 29
Implied Volatility as a Predictor of Stock Movement and Probabilities 30
The Distribution Curve 31
Breakout Stocks 45
Actual versus Historical Distribution Curves 50
CHAPTER 4 Trade Probabilities: What to Look For 55
The Results 59
How to Calculate Option Probabilities 63
CHAPTER 5 Choosing Your Trades 67
Choosing Your Underlying 67
Making an Assumption 78
CHAPTER 6 Choosing a Strategy 83
Defined Risk Trades 85
Credit Spreads 85
Debit Spreads 88
Butterfly 89
Iron Condor 91
Calendar Spreads 92
Undefined Risk Trades 96
The Straddle 97
The Strangle 97
Short Naked Puts 98
Ratio Spreads and Back Spreads 100
What Time to Expiration Should My Trades Have? 103
Trading Earnings Announcements 105
CHAPTER 7 Exiting Trades 123
The Variables 123
The Kelly Criterion 125
Morning Routine 130
To Log Your Trades or Not to Log Your Trades 135
CHAPTER 8 Executing Your Trades 141
Order Types 142
CHAPTER 9 Portfolio Management 153
Two Types of Risk 154
The Goal: Diversification Minimizing Unique Risk 155
The Methods: Correlation and Number of Positions 156
Identifying and Mitigating Systematic Risk 163
Trade Sizing 180
Early Exercise 183
Conclusion 189
About the Website 191
About the Author 193
Index 195
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